Karen Millen shop in London. The fashion chain was co-founded by retail entrepreneur Kevin Stanford. Photograph David Sillitoe for the Guardian

Veteran retail entrepreneur Kevin Stanford has been ordered by a court in Iceland to pay up on a £1.3m personal guarantee he gave to secure borrowings used to finance his investment empire.

The 2005 loan of 4.2bn Icelandic krona (£39m) was advanced by Icelandic bank Kaupthing, which collapsed two and a half years ago. The loan had been due to be repaid in November 2008. The funds went to investment company Materia Invest, 33% owned by Stanford, who is best known in the UK for co-founding retail chain Karen Millen.

A court in Reykjavik ordered Materia Invest to repay ISK6.3bn (£33.7m) to Arion Bank, which is 87% owned by creditors to Kaupthing. The investment vehicle is thought unlikely to have assets sufficient to repay this sum. As security for the loan Kaupthing had demanded personal guarantees of just ISK240m each from Stanford and his two Materia Invest co-owners, Thorsteinn Jonsson and Magnus Armann. All three were close business associates of Baugur Group tycoon Jon Asgeir Johannesson. Jonsson has honoured his guarantee on the loan; Arman and Stanford were ordered by the court to do so too. Materia Invest's main investment was a stake of almost 10% in now insolvent FL Group, the Icelandic investment group which then owned Icelandair and had a 17% stake in British no-frills carrier easyJet. Also among FL's major backers – with a 16% stake – was Baugur Group, controlled by Stanford's close business associate Jon Asgeir Johannesson.In 2009 Stanford fought – and lost – a bitter legal battle with Kaupthing administrators over the ownership of highly successful fashion chain All Saints. During court proceedings it was claimed that Stanford owed more than £250m to Kaupthing.

The British retail entrepreneur had close ties to Jon Asgeir's empire: he and Baugur were joint backers of Unity Investments, with interests in Moss Bros, Debenhams, French Connection and Woolworths.

Shortly before Kaupthing's collapse, Stanford became a leading shareholder in the bank. Since the bank's failure, offshore companies he controlled have become embroiled in a criminal investigation into market manipulation for Kaupthing's credit derivatives.

The inquiry involves the Serious Fraud Office and Financial Services Authority and counterparts in Iceland, but there is no suggestion of dishonesty on the part of Stanford. He is not thought to have known the trades might amount to market abuse on the part of Kaupthing.

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